Quid pro quo leases and the ground rent cap

The government is legislating to cap ground rent at £250 per year, changing to a peppercorn after 40 years. The measures in the Bill, including the cap on ground rent, have been published in draft form and have undergone pre-legislative scrutiny by the Housing, Communities and Local Government Committee.  

In introducing the cap, the government’s objectives are to: address unregulated and unaffordable ground rents, and end the anachronism of ground rents and the current two-tier ground rent system.

Ground rents are an annual or periodic charge that leaseholders are obliged to pay to freeholders under the terms of their lease. Unlike a service charge, there is no requirement to provide a service in return for this payment. They are a feature of an outdated and feudal leasehold system. When implemented, the ground rent cap will immediately address affordability issues that leaseholders face. It will also simplify the process of buying and selling leasehold properties. The subsequent change to a peppercorn cap will effectively end the vast majority of residential ground rents. These reforms will deliver a modernised, more efficient property market.

As set out in in our policy paper, the government is considering whether the Bill should include an exemption for leases where a higher ground rent is specifically negotiated in return for at least an equivalent discount on the premium. These negotiated leases are known as quid pro quo leases. If a leaseholder and freeholder have specifically agreed a higher ground rent in return for a lower premium, the ground rent acts as a form of payment for the lease in return for this reduced premium, rather than as an additional payment. Quid pro quo arrangements can be agreed when a lease is originally granted or when an extension is granted. In cases like this, a cap on ground rents could be considered to be unjustified. This consultation seeks further views from specialists and those with experiences of these leases.

Some stakeholders have argued that ground rents generally function in this way, as part of the payment for the lease, with a corresponding discount on the premium. To date, the government has not seen convincing evidence of this. In the vast majority of cases, leaseholders are not given a clear choice about whether to pay ground rent or how much it should be. We are not considering a broad exemption from the cap, but one that applies only where there is a specific, clear agreement by the parties for a higher ground rent in exchange for a corresponding lower premium. It is vital that any exemption for quid quo pro leases does not undermine the policy objectives of the ground rent cap.

This consultation explores the prevalence of genuine quid pro quo leases which have been fairly negotiated between the parties, and considers how these might be treated under the ground rent cap. Section 1 sets out the overall considerations relating to quid pro quo leases. Section 2 asks how they should be defined, and section 3 considers how to make a definition work in practice, including questions relating to enforcing an exemption and ensuring it is properly understood and used. Section 4 considers how exempt ground rents should be treated. Section 5 considers the position of successors in title. Finally, section 6 asks specific questions to be answered by leaseholders and freeholders who have agreed on quid pro quo arrangements to understand the prevalence and uses of such leases.

We will use the information provided through this consultation to determine whether any exemption for such leases is needed and, if so, how it should operate.